Snowy Hydro will use wind and solar to pump water uphill, slashing its energy generation costs.Credit:Andrew Sheargold

Pumped hydro storage works by using water power within a closed looped system, where the water generates energy by draining from a dam at the top of a hill down through turbines to a reservoir at the bottom and is then pumped back to the top dam again to restart the cycle.

Snowy Hydro previously used energy from the grid – typically coal or gas – to pump the water. It is now going green by using wind and solar power instead.

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Under the deal with investors including Macquarie Bank and BP, Snowy Hydro's pumped storage will now be powered by four solar farms and four wind farms in New South Wales and Victoria.

Mr Broad said the 880 megawatts of solar and wind energy would help provide cheaper power to about half a million homes.

He said it would create wholesale electricity prices, which constitute a large segment of power bills, below $70 a megawatt hour from the start of 2020.

Electricity is currently being traded on the ASX energy market for the first quarter of 2020 at $98.5 a megawatt hour in NSW and $108 per megawatt hour in Victoria.

The new agreement would also provide a major influx of energy back into the system from 2020, he said.

As Snowy Hydro will no longer rely on the 2800 megawatt hours of energy needed annually for pumping, it frees up this energy to be returned to the grid, putting the equivalent of half a coal-fired power station back into the system.

It will be cheaper as it takes advantage of the excess renewable energy that is generated at times when demand is lower, as wind power is at its highest in the early morning and solar is at its peak during the middle of the day, Mr Broad said.

By using wind and solar power to run its pumping operations, Snowy Hydro effectively stores the energy to use when demand is at its highest.Credit:Photo: Bloomberg

This effectively 'stores' the excess energy so that it can be used later during heavy demand periods, and pushes cheaper wind and solar power to times when it is needed.

"The National Electricity Market needs something that can not only fill in the peaks of supply - when demand is as its highest - but absorb that cheap power," Snowy Hydro's chief commercial officer Gordon Wymer said.

"That's where pumped storage comes in. This means you don't have to waste wind and solar, it makes them economically optimal."

He compared it to other major storage projects like the Tesla powerwall in South Australia, saying it was significantly cheaper to store energy and return it to the grid.

The deal is not part of the major Snowy 2.0 upgrade to the generator.

Mr Broad said Snowy Hydro was still focused on achieving a financial investment decision for the Snowy 2.0 project by mid-December.